In an M&A transaction, the seller typically does maintain some liability to the buyer, which will be reflected, in part, in escrows and holdbacks.
To satisfy potential future indemnity claims—detailed within the indemnification section of the agreement—a portion of the purchase price is usually withheld in the form of an escrow or a holdback. The difference between those is whether the funds are held by a third party—escrow—or the buyer itself—a holdback. Contract terms describe the percentage of the consideration withheld, the duration of the obligation, known as a “survival period”, how and by whom the escrow is to be funded, and so forth.
To prevent death by a thousand cuts, a basket provision is often included that details the minimum amount of damage the buyer must sustain before the seller is required to pay for losses. Conversely, a cap provision places a limit on the aggregate of claims drawn against the escrow. Some liabilities remain uncapped—legal authority for the sale, taxation and intentional fraud, for example.
Generally we see escrow amounts in the range of 10-15% and a survival period of 12-24 months. The exact numbers depend on the inherent risk and the likelihood of liability, but skillful negotiation around factors like an independent board of directors, solid financials, good corporate governance, etc., serve to mitigate risk and increase buyer confidence.
One of the advantages of having multiple buyer candidates in an orchestrated engagement is that escrow, like all structural elements of the deal, can be negotiated. We’ve even seen escrow completely taken off the table, to sweeten a buyer’s offer and win the deal.